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Wage Structure and Inflation-Wage Relationship in Turkey

The Turkish economy's structural features amplify the impact of wage increases on economic balance. In Turkey, minimum wage earners constitute around 40% of the workforce, a much higher percentage than in European countries. The large number of workers earning minimum wage is a concern for both employers and employees. Furthermore, wage increases are a crucial factor in inflation, which is the most significant issue facing the Turkish economy in the short term. Wage levels have a positive impact on price movements through demand and supply channels. Therefore, the rate of increase in the minimum wage is closely monitored by all segments of society except for employers and employees. Analyzing the relationship between the wage structure and indicators such as inflation in Turkey is one of the factors that facilitates the predictability of the economy in the short and medium term. For this reason, this article will examine the structure of the labor market in Turkey and wage levels, as well as the relationship between inflation and wages.


 



Labor Market and Wages in Turkey


The labor market and wage levels are influenced by the structural characteristics of economies. Factors such as the distribution between sectors in the economy and the level of development shape the labor market and the distribution of wages. In Turkey, the distribution of the labor force and wage levels paid to labor differ significantly from those in European countries. Based on data from Eurostat and SSI, the percentage of workers earning minimum wage in European countries did not exceed 16% in 2018. However, in Turkey, this percentage is over 36%. It is worth noting that there has been a significant increase in the proportion of minimum wage workers in Turkey since 2018, the last year for which Eurostat provided data in this area.

 

This situation leads to wage levels accumulating within a certain range, causing the average wage to converge towards the minimum wage. The chart below displays data on low wages. According to the OECD's low-wage data, employees who earn less than two-thirds of the average wage are considered low-wage. The chart below shows the ratio of low-wage workers to the workforce in different countries. As can be seen, Turkey's rate is only 1%, which is well below the OECD average of 14%. It can be inferred that a considerable proportion of low-wage workers in Turkey earn a wage that is similar to the average wage level. The minimum wage being close to the average wage and a high percentage of workers earning the minimum wage contribute to the observed distribution of wage levels.

 

The prevalence of minimum wage earners in Turkey's labor market indicates a structural characteristic. Minimum wage is the legally mandated minimum level of compensation for workers. Typically, those who earn minimum wage are part of the unskilled labor force. Thus, when average wages in an economy are close to the minimum wage, it suggests that a significant portion of the workforce is unskilled. The structural transformation of the Turkish economy since the 1990s has contributed to this situation. Employment has mainly increased in sub-branches of the service sector, indicating a trend towards a more service-oriented economic structure. This failure to achieve desired progress in the industrial sector has led to this trend (İncekara & Gürbüz, 2023). The labor market and wage levels are influenced by the fact that industrialization is not yet at an ideal level and the sectoral distribution favors services, where there is a high demand for unskilled labor. It is important to note that although a significant portion of those employed in the industrial sector are declared as minimum wage workers for various reasons, they do not necessarily work for minimum wage. During this period, the ratio of minimum wage workers to employment volume in Turkey has increased due to technical staff receiving higher wages but working for the minimum wage. It is important to note the impact of this factor on the shortage of intermediate staff in the industry.

 

The wage levels are determined by various factors, including the shortage of qualified intermediate staff, particularly in the industrial sector. This issue can be attributed to a mismatch between the needs of the education system and the labor market. The demand for qualified workforce, especially in production-oriented sectors, is increasing, making it challenging to find suitable candidates. It is contradictory to encounter such a problem in an economy where the number of university graduates is increasing. However, the supply of qualified university graduate labor force does not meet the demands of the market, resulting in labor market inefficiency. A workforce equipped with the knowledge required for each job is needed at different stages of the production process. Although the number of university graduates has increased, there is a shortage of qualified intermediate staff to meet the demand, resulting in a concentration of the workforce at the unqualified and qualified ends. The excess supply of labor at the ends causes the average wage to decrease, while the demand at the intermediate levels remains unmet. In addition, the concentration of educated labor in certain business sectors can lead to an excess supply of workers, which in turn can push wages down.

 

Therefore, it can be observed that the gap between the average wage and the minimum wage in Turkey has decreased. This situation, when evaluated in conjunction with the high percentage of workers earning minimum wage, highlights the significance of minimum wage increases. Although the minimum wage directly affects many employees, it indirectly affects wider segments of people as a determinant of the average wage. In general, wage increases are shaped in parallel with the inflation rate and improvements in the minimum wage. According to the CBRT inflation report, every 1% increase in the minimum wage causes a 0.93% increase in the average wage. It can be said that the minimum wage affects a large part of society through many channels. In this case, it is important to determine the extent to which wage increases are affecting the current peak in inflation rates in recent years.

 

Inflation and Wages in Turkey


There is a relationship between wage increases and inflation that operates through demand and supply channels. Increases in wages stimulate an increase in demand and the purchasing power of the wage earner. The share allocated to consumption in the current income of low-income segments is significant. Since minimum wage earners tend to spend a significant portion of their income, the rate at which wage increases turn into consumption expenditures is quite high. Although there are slight savings increases, most of the wage increase is reciprocated in the form of increased demand. If production levels do not increase in the short term, the increase in demand will cause a general increase in prices. However, the recent high inflation rate has significantly affected spending habits. Expectations of price increases in most areas have led to increased consumption and spending, particularly on durable consumer goods. According to the latest inflation report, although the prices of some durable consumer goods have started to decline due to the steps taken to fight inflation, the tendency to spend remains high. Therefore, increasing the minimum wage will inevitably contribute to demand-side inflation.

 

In discussing demand-driven price increases, it is important to consider the primary source of the current inflationary environment. The Covid-19 pandemic and the subsequent Russia-Ukraine war have caused a negative supply shock, leading to price increases. The economic stagnation resulting from the contraction in production and the rise in costs has led to the emergence of serious inflation problems in both developed and developing economies. In this regard, measures taken to control price increases have favored contractionary policies aimed at restricting total demand. The preferred method of combating inflation is by preventing price pressures caused by negative supply shocks from being supported by demand. Although supply-side pressures are the main trigger of price increases, demand-reducing measures are preferred to prevent economies from entering an inflationary spiral. The slowdown in economic activity and decrease in demand help to curb inflation expectations by slowing down price increases. This prevents an inflationary spiral where permanent inflation expectations for the future drive price increases through wages and total demand. Therefore, it can be said that contractionary policies implemented worldwide aim to prevent supply shock-induced price increases from becoming permanent.

 

Sudden increases in exchange rates can cause supply shocks in the Turkish economy, leading to cost increases. The depreciation of the Turkish lira has resulted in alarming cost increases in many sectors. As a result, sensitivity to wage level increases, which contribute to labor input costs, has also increased. Wage payments make up a significant portion of operating costs. Companies that experience an increase in total operating expenses due to a rise in the minimum wage typically respond by either increasing product prices or reducing labor demands. As a result, wage increases have a direct positive impact on prices. One reason for the high share of wages in operating costs is the continued use of labor-intensive production methods in areas where mechanization is not yet widespread. The impact of minimum wage increases on prices is heightened in labor-intensive production sectors, such as textiles. Although the minimum wage increases in 2023 did not elicit any response from businesses due to high domestic demand, the tightening of monetary policy and subsequent contraction in domestic demand has made the minimum wage increase a burden for companies. However, the recent decrease in foreign demand presents a challenge for companies, particularly in labor-intensive sectors where the advantage of cheap labor in foreign markets is being lost.  This has resulted in a decrease in market shares and production, as well as an increase in costs and inflation.

 

 

Wage increases can cause inflation through expectations. Minimum wage increases can strongly influence expectations regarding pricing behavior in society. In fact, our country experiences upward price movements during the New Year periods following the announcement of the minimum wage improvement rate. Higher than expected increases may lead to increased price expectations and inflation. To establish predictability for 2024 and curb inflation expectations, the CBRT has set the upper limit of inflation at 42% and the lower limit at 36%, with the midpoint at 30%. Therefore, expectations should be formed within this range, which is also the target. A minimum wage increase that exceeds this range would prevent expectations from becoming anchored and could have negative effects on pricing behavior, making it difficult to achieve the inflation target. The 49% increase in the minimum wage is higher than the expected inflation rate, indicating a real increase. This increase in price expectations can fuel inflation by causing front-loaded increases in the prices of goods and services. The severity of the impact of this increase on pricing behavior can only be assessed after the January 2024 inflation rate is released.

 

Considering all of these effects, it appears that any increase in the minimum wage should be approached with a fine balance in mind. In recent years, increases in the minimum wage above the inflation rate announced by TUIK, occurring twice a year within the scope of election economy, have enabled the minimum wage to appreciate in real terms. However, it is difficult to claim that there has been an increase in the living standards of the wage earner. Furthermore, although there have been improvements in the minimum wage, the share of labor in GDP has decreased in recent years. This issue, which is a problem experienced due to the economic situation after the pandemic in developed countries, can be considered a problem related to the wage structure when viewed in conjunction with the general wage structure in Turkey. The reduction of the labor force's share in GDP can be attributed to factors such as the convergence of average wages to the minimum wage and labor market inefficiency. It is worth noting that despite the decrease in the share of wages paid to labor in GDP, inflation remained unchanged. Although the wage earner sector's share of total income decreased, the high consumption tendency and changes in spending habits caused by inflation prevented a decrease in demand.

 

Furthermore, the disappearance of the middle-income segment and the deterioration of income distribution, along with the concentration in low and high income groups, have a significant impact on total expenditures. The low-income group, which spends a significant portion of its income, contributes to inflation, while the high-income group's luxury consumption habits drive price increases. It is important to note the differing consumption patterns between these groups. According to Figure 6, the low-income group accounted for only 8% of total consumption expenditures in 2022, while the top 20% of the high-income group accounted for 37.38% of consumption. Therefore, long-term changes that encourage saving across all segments of society are necessary to reduce overall demand.

 

It is not possible to achieve a social transformation that will immediately affect the spending patterns of different income groups. To avoid inflation caused by expectations of wage increases and supply-demand price pressures in the fight against inflation, the minimum wage must be determined by considering social and economic balances. A suitable increase rate should be determined to ensure production can continue without imposing a significant cost burden on companies and to maintain the purchasing power of low-income groups. In the long term, it is necessary to develop permanent solutions to address the existing structural problems in wage distribution and the labor market discussed above.

 

References

 

İncekara, A., & Gürbüz, A. Ş. (2023). Türkiye Ekonomisinde Yapısal Dönüşüm: Üç Sektör Teorisi Çerçevesinde Bir Analiz. In A. İncekara & S. A. Oktar (Eds.), Cumhuriyetin 100. Yılında Türkiye Ekonomisi (pp. 1-21). İstanbul: Istanbul University Press.


 

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